Should 60-Somethings Use Savings to Pay Off Credit Cards?

An AARP member asks The Money Coach for advice

En español | Q: We have about $15,000 in credit card debt. I think we should take money out of our savings (about $100,000) to pay off these debts. My wife thinks we should just pay them down on our annual income of $90,000 gross. Who's right?

--Marc, 65, Arlington, Texas

Pay Down Your Debt

A: In this case, your strategy is probably best. Since you have the cash on hand, I'd recommend that you go ahead and pay off the credit card debt in order to be rid of it sooner rather than later. Eliminating your credit card debt will make it far easier for you to ease into retirement with the least amount of financial strain.

Recognize, however, that this situation isn't as clear-cut as you might think. The best way to determine what to do is to look at three factors: the financial implications, the emotional ramifications and the retirement considerations.

The Financial Implications
Start by examining the economics of your present situation. What's the average interest rate on your credit cards versus the return rate you're getting on your savings? Since your credit card interest rate likely far exceeds the rate on your savings, it may seem like a no-brainer — financially speaking — to immediately get rid of the debt using savings.

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Let's not forget, though, that by tapping your savings, you'll be forgoing any potential upside of keeping that money in a savings/investment account. Depending on where your savings are held, you may also have to tap a certificate of deposit, or pay any taxes or penalties to access that cash.

But let's say you took your wife's approach and paid off the $15,000 in debt through your earnings over, say, three years. At that pace, and assuming a 14.5 percent interest rate (the national average), you'd have to pay $516 a month to the credit card companies. Taking into account all your other bills, is such an aggressive payoff plan financially palatable to you?

The Emotional Ramifications
Here's where things get a lot trickier — and far more subjective. It sounds as if your wife is willing to live with the debt, at least for a while longer, and you are not. Perhaps the debt keeps you up at night and causes you stress or headaches. If so, share that information with your wife. She might better appreciate how you're being impacted, and she might be inclined to use that savings to eliminate the debt.

By the same token, if your wife fears living in poverty later or worries about not having money for food or shelter, you have to look at it from her point of view. You're 65 years old. Since the two of you are presumably within striking distance of retirement, it's not unreasonable for her to want to maintain the biggest possible cash cushion. Whatever the case, it's important to take each other's feelings and emotions into account.

Regardless of whether each of your emotions about money are rationale or well-founded, recognize that your fears, dreams and hopes about how to spend cash and handle debt are just as valid as the financial implications involved in your decision.

The Retirement Considerations
A final factor to consider, of course, is how tapping your savings might impact your retirement options. Will utilizing those funds force you to work longer to replenish that $15,000? If so, make sure you are both comfortable postponing retirement.

Additionally, if your $100,000 in savings represents the entirety of your retirement nest egg, then taking 15 percent of it to immediately pay off debt could leave you open to financial hardship down the road if something unexpected happens, such as an illness or a job loss.

Finally, if your $100,000 in savings is held in an investment account, and generating a pretty decent return, how much in compound interest do you stand to lose over time by tapping that money to pay off debt? You don't want to have to invest more aggressively in retirement simply because you're trying to "make up" for lost interest or depleted savings.

If you discuss each of these factors with your wife, and each of you maintains an open mind, I'm sure you will come to a decision that you both can live with. At the very least, you will understand one another far better. And no matter how long you've been married, that deeper understanding can lead to financial harmony in your relationship for the rest of your lives.

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